MARKET COMMENTARY – SEPTEMBER 2021

The reopening of the global economy continued in August with a number of developed markets further lifting restrictions. Economic data was strong, though much of the developed world appears to be at or just past the peak rate of growth, with a number of leading economic indicators moderating, yet still at high levels.

On the virus front, the Delta variant continues to spread and daily cases are increasing across the globe. Importantly in Europe and the UK, the vaccination programmes have meant that hospitalisations have not risen anywhere near as fast as during the last wave. In the US, hospitalisations have increased more sharply, raising some concerns that the link between infections and hospitalisations has not been as effectively broken there, due to lower vaccination take-up. Data from the UK and Israel also suggests that antibody protection from the vaccines wains after six months, although protection against severe disease remains high. In response, a number of countries have announced booster programmes to deliver third doses to their populations. For the moment it seems that the protection delivered by vaccines will allow the global reopening to continue, with the impact of the Delta variant likely to be more evident in ongoing supply chain disruptions rather than in a return to economic shutdowns in the developed world.

Against this backdrop global equities performed impressively in August, delivering +2.5%. Growth stocks, including many in the technology sector, benefitted from continued low US bond yields to post total returns of +3.3%, helping the S&P 500 to deliver returns of +3.0% and August saw further record highs for US equities. Emerging market equities initially stalled under the combination of a tougher stance from Chinese regulators and increased virus concerns, but later rebounded to return +2.6% over the month.

Economic data in August pointed to an economy that, while past the peak rate of growth, is still expanding at a sufficiently high rate for concerns around building inflationary pressures to remain. In the US the headline consumer price index (CPI) came in at 5.4% year over year, under the surface, however, core CPI fell marginally and pressure from a number of areas such as used cars appear to be easing. The labour market remains very strong in the US with 943,000 jobs added in July and wages rose by 0.4% month over the month. This suggests that while headline inflation may begin to ease as transitory factors start to fade, underlying longer-term wage pressures are continuing to build.

The US Federal Reserve is maintaining the view that inflation will be transitory and expects employment levels to reach the point at which it slows the purchase of government bonds (tapering) by the end of this year, with a separate timetable for interest rate increases. Attention will now turn to the September meeting of the Federal Open Market Committee for more news on tapering and the release of the committee’s latest rate forecasts.

The UK finally lifted the last domestic Covid-19 restrictions in August. Daily coronavirus cases, which fell at the beginning of the month, increased steadily through the latter half of the month, but hospitalisations have remained stable as the vaccines reduce the numbers requiring treatment. August’s economic data also generally suggested that the UK may be past the peak rate of economic growth, with supply chain and labour constraints continuing to limit activity. That said, the strength of the domestic reopening helped propel the FTSE All Share to deliver total returns of +2.7% over August with the more domestically focused FTSE 250 returning a particularly robust +5.3% over the month with support from high levels of takeover activity.

UK employment data remains robust, the economy added 95,000 jobs in June. The proportion of the workforce on the furlough scheme, which is due to end in September, remained steady at around 7%, but with job vacancies at record highs it seems likely that the scheme should be able to wind down successfully, which may help alleviate some of the labour constraints the economy is currently facing.

UK inflation (CPI) declined slightly in August to 2.0% year on year, however this is expected to be only a temporary pause. With inflation concerns escalating, the Bank of England outlined the sequence by which it will withdraw its policy support. The plan will see the Bank cease to reinvest proceeds from maturing government bonds once interest rates reach 0.5%. They will then consider actively selling bonds when interest rates reach 1.0%.

Having started its reopening and vaccination programmes later, Europe is slightly behind the US and the UK on the road to normalisation. Economic data was strong in August, with both the manufacturing and services sectors expanding strongly. However, momentum has eased slightly and Europe is now possibly at its peak rate of growth, a few months behind the US and UK. Although the spread of the Delta variant of the virus has caused cases in Europe to rise rapidly, denting consumer confidence, over 70% of the population are now vaccinated and hospitalisation rates have remained much lower than in previous waves.

Emerging market equities have been largely driven by events in China recently. The regulatory changes introduced by the Government continued through August with a widening number of industries and sectors impacted negatively. Continued volatility can be expected as a result of further Chinese regulatory efforts as attention appears to be turning to social issues at the expense of capital markets. China has also had to deal with the arrival of the Delta variant, which thus far appears to have been contained at the cost of mobility and some economic activity. Cases in India remain low despite a rebound in mobility, but outside of China and India, the slow pace of emerging market vaccinations has left many countries vulnerable to the Delta variant.

The global reopening has continued but as expected, a number of the countries at the forefront are now seeing the rates of their recoveries start to slow. The Delta variant continues to pose a risk to the global outlook, but for developed economies, this is more likely to be in the form of supply constraints rather than further lockdowns. While uncertainty has increased, it seems unlikely to derail the recovery, although recent economic data indicates that the easiest part of the reopening is now behind us. So while room for further gains from equity markets exists greater selectivity is likely to be required along with suitable levels of diversification.

Total returns to 08/09/2021

 * July 2021

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.